Economic uncertainty is a constant challenge for small and medium-sized businesses (SMBs) and startups in the B2B SaaS industry. Rising interest rates, cautious investors, and reduced consumer spending can strain revenue streams and complicate cash flow management.

Startups, in particular, operate with limited resources, making them more vulnerable to financial instability. These conditions emphasize the need for a proper SaaS financial model.

But here’s what most founders don’t realize: Creating a SaaS financial model isn’t just about plugging numbers into spreadsheets. It’s about understanding the subscription economy and how it impacts your bottom line.

Tips to Build a Finacial Model for Saas Startup or SMBs

Let’s explore five tips that will help you build a financial model that actually works for your B2B SaaS business. 

1. Prioritize Revenue Recognition

When building a SaaS financial model, metrics like Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) are critical. They provide a clear view of predictable income streams essential for assessing long-term viability. 

Besides tracking recurring revenue, you need to understand how to properly recognize revenue in your financial statements. In SaaS, when a customer signs up for a plan, you collect payment upfront but deliver service over time. This timing mismatch can make your financial statements misleading if not handled correctly. 

According to Attrock, SaaS business owners can manage and record their revenue using the right revenue recognition platforms such as Chargebee, Younium, Zuora, and many others.

So, as you track MRR and ARR for cash flow planning, also track deferred revenue to account for prepaid subscriptions. Create separate trackers for the following:

• What customers have agreed to pay (contract revenue recognition)
• What’s actually in your bank (cash accounting)
• What you can claim as earned (recognized revenue)

2. Consider Customer Acquisition Costs (CAC)

CAC goes beyond your marketing spend and includes the full costs associated with acquiring new customers. These include:

• Compensation for your sales staff 
• The tools and platforms you use for marketing activities 
• The costs of producing marketing content like blog posts, videos, and ads 
• Software and resources that support your sales team’s effectiveness 

Calculating the full CAC allows you to project the profitability of customer acquisitions over time. This informs pricing, marketing budgets, and revenue forecasts.

You should also break down your CAC by acquisition channels, such as organic search, paid ads, and referrals. It allows you to identify the most cost-effective channel so you can allocate resources. A detailed CAC tells investors that you understand your customer economics and can sustainably acquire new customers.

3. Optimize Billing and Revenue Collection

Billing can be complex for SaaS businesses, especially those with flexible billing cycles and proration needs like upgrades. Inefficient billing can result in revenue leakage and customer dissatisfaction. However as explored in the Younium subscription billing guide,  the right billing software can automate and optimize billing processes, reducing errors and maximizing revenue recovery.

Accurate billing ensures that you correctly recognize and record revenue from your customers. This predictability helps in forecasting future cash inflows in your SaaS financial model. It also allows for better decision-making around cash reserves and operational investments.

When choosing a recurring billing solution, you need to prioritizing these features:

• Automated invoicing with customization
• Syncing recurring bills with your accounting software
•  Supported payment methods
• Transaction security

4. Factor In Customer Churn

In SaaS financial modeling, churn helps you understand your business’s stability and growth potential. It measures the percentage of customers who stop subscribing over a given period, revealing trends in customer retention.

When accounting for churn in your SaaS business, track it based on when a group of customers signed up. For instance, your first set of customers may have a significantly lower churn rate than those who signed up more recently. This can help you understand the factors driving retention and better forecast future revenue.

You should also monitor leading indicators like support tickets and feature usage. They can inform you of frustrated customers or those who don’t fully engage with your product. This puts them at high risk of churn.

5. Regularly Update Your Model 

A SaaS financial model isn’t a set-it-and-forget-it document. As your business grows and market conditions change, the model should evolve. Integrate real-time data from various departments, like sales, customer success, and finance, to capture shifts in growth, expenses, and customer behavior. 

Your recurring billing software should have built-in analytics that can provide instant updates on MRR, ARR, churn, and other metrics. An updated financial model is a true reflection of your business, enabling you to spot emerging trends and risks before they become major issues.

Build Financial Model for Saas Business

A financial model isn’t optional but essential for the success of your B2B SaaS business. Use the tips we’ve shared to build a model that helps you make better decisions about growth, funding, and resource allocation.

Remember: Your financial model is a living document. Review and update it regularly as your business evolves and market conditions change.